Rating Report RATING REPORT Meezan Bank Limited (MBL) REPORT DATE: June 29, 2017 RATING ANALYSTS: Osman Rahi, Osman.rahi@jcrvis.com.pk Talha Iqbal Chhangolia Talha.iqbal@jcrvis.com.pk RATING DETAILS Latest Rating Previous Rating Rating Category Longterm Shortterm Longterm Shortterm Entity AA A-1+ AA A-1+ Sukuk AA- AA- Rating Outlook Stable Stable Rating Date Jun 22, 17 Jun 2, 16 COMPANY INFORMATION Incorporated in 1997 Public Limited Company Key Shareholders (with stake 5% or more): Noor Financial Investment Co, Kuwait 49.1% Pakistan Kuwait Investment Co. (Pvt.) Ltd. 30.0% Islamic Development Bank, Jeddah 9.3% External auditors: M/s EY Ford Rhodes (Previously M/s A.F. Ferguson & Co.) Chairman of the Board: Mr. Riyadh S.A.A. Edrees Chief Executive Officer: Mr. Irfan Siddiqui APPLICABLE METHODOLOGY(IES) PRIMER - Commercial Banks (November 2015): http://www.jcrvis.com.pk/images/meth-commercialbanks201511.pdf 1 P a g e
Rating Report OVERVIEW OF THE INSTITUTION Meezan Bank Limited is the largest Islamic commercial bank in Pakistan, which commenced operations in March 2002, after being issued the first ever Islamic commercial banking license by the State Bank of Pakistan (SBP) Noor Financial Investment Company Limited, Pakistan Kuwait Investment Company (Pvt.) Limited and Islamic Development Bank are the primary shareholders of the bank Profile of Chairman Mr. Riyadh Edrees serves as Chairman of the Board. Mr. Edrees holds more than 26 years of experience at various organizations Profile of CEO Mr. Irfan Siddiqui is the founding President and CEO of the Bank. Mr. Siddiqui is a qualified Chartered Accountant from the Institute of Chartered Accountants of England & Wales. RATING RATIONALE Meezan Bank Limited (MBL) is the largest Islamic Bank in the country having a market share of 35.9% in total Islamic banking deposits. With aggressive branch expansion pursued over the last 5 years, branch network has more than doubled to 571 (2011: 275) branches at end-dec 2016. Resultantly, deposit base has grown at a CAGR of 27% over the last five years. Effective implementation of strategy and monitoring branch performance is ensured through branch performance monitoring tool namely; balanced scorecard comprising of financial and non-financial KPIs. Key Rating Drivers Financing portfolio: Gross Financing portfolio of the bank witnessed a growth of 48% during 2016. While corporate portfolio continues to represent three-fourth of financing portfolio, management continued to diversify its lending operations with sizeable growth in consumer and commercial & SME segment. Despite increase in the number of clients over time, concentration in the corporate portfolio is on the higher side and is a function of strategy of lending to top-tier names. Moreover, large counterparties include government guaranteed/public sector exposure representing one-fourth of the financing portfolio. Commercial banking portfolio primarily features diversified commodity related short-term self-liquidating exposures. Increase in consumer financing has been driven by auto and home loans with infection in the portfolio being well below industry norms. Asset quality indicators compare favorably to peer banks. Maintaining asset quality indicators in line with benchmarks for the assigned ratings is considered important. Liquidity: Liquidity profile of the bank draws support from a healthy customer franchise and a solid funding base, largely comprising cost effective retail deposits. Moreover, liquid assets in relation to deposits and borrowings were sizeable. Depositor concentration levels have increased slightly on a timeline basis but are still amongst the lowest in the industry. Focus on new-to-bank and current accounts will continue to drive deposit strategy, going forward. Profitability: Despite pressure on spreads, profit before tax increased by 5.8% due to volumetric growth in earning assets and higher fee based income. Although, efficiency ratio (excluding capital gain & other income and adjusted for takaful and tracker expense on Ijarah) for full year 2016 was higher at 65.6% vis-a-vis 59.9% for 2015 (excluding capital gain and other income), the same has depicted an improvement during 1Q17 vis-à-vis 1Q16 and is primarily attributable to increase in fee income. Growth in fee income was supported by increase in income from ADCs and healthy growth in trade and remittance business. In the backdrop of forecasted mid-term economic scenario and policy rate regime and low lending rates due to excess liquidity, spreads and profitability growth of the banking sector are expected to remain under pressure during 2017. Capitalization: Equity base of the bank has consistently grown over the last five years with average rate of internal capital generation being 11.5%. This has allowed the bank to maintain capitalization indicators at adequate levels over the last few years. While remaining above regulatory requirements, Tier-1 CAR and leverage declined on a timeline basis with significant growth in financing portfolio. However, overall CAR increased with issuance of Tier-2 Sukuk in the outgoing year. In the backdrop of increasing Tier-1 and overall CAR requirements, JCR-VIS will continue to track buffer over regulatory requirement in line with benchmark for the assigned rating. 2 P a g e
Meezan Bank Limited FINANCIAL SUMMARY Appendix I (amounts in PKR billions) BALANCE SHEET DEC 31, 2016 DEC 31, 2015 DEC 31, 2014 Total Investments 130.2 146.3 114.1 Gross Advances 319.6 215.8 183.3 Total Assets 657.8 531.8 437.5 Borrowings 32 13.6 15.5 Deposits & other accounts 564 471.8 380.4 Subordinated Sukuk (Tier II) 7 - - Tier-1 Equity 27.5 24.8 22.3 Net Worth 30.5 26.3 23.3 INCOME STATEMENT DEC 31, 2016 DEC 31, 2015 DEC 31, 2014 Net Mark-up Income 18.6 18.2 13.4 Net (reversal) Provisioning (0.18) 0.56 0.47 Non-Markup Income 5.8 4.6 4.8 Administrative Expenses 15.5 13.6 10.5 Profit Before Tax 8.9 8.5 6.9 Profit After Tax 5.6 5.0 4.6 RATIO ANALYSIS DEC 31, 2016 DEC 31, 2015 DEC 31, 2014 Market Share (Advances) (%) 5.7% 4.4% 4.1% Market Share (Deposits) (%) 5% 4.9% 4.5% Gross Infection (%) 2.1% 3.3% 3.8% Provisioning Coverage (%) 118% 116.2% 109.6% Net Infection (%) 0.08% 0.1% 0.4% Cost of deposits (%) 2.4% 3.5% 4.6% Net NPLs to Tier-1 Capital (%) 0.88% 0.86% 2.7% Capital Adequacy Ratio (C.A.R (%) 12.9% 10.9% 11.8% Markup Spreads (%) 3.97% 4.8% 4.1% Efficiency (%) 65.6% 59.9% 61.3% ROAA (%) (based on 5 pt. averages) 1% 1.1% 1.2% ROAE (%)(based on 5 pt. averages) 20.9% 20.4% 21.9% Liquid Assets to Deposits & Borrowings (%) 53.6% 60.9% 54.9% 3 P a g e
ISSUE/ISSUER RATING SCALE & DEFINITIONS Appendix II 4 P a g e
REGULATORY DISCLOSURES Name of Rated Entity Sector Type of Relationship Purpose of Rating Rating History Appendix III Meezan Bank Limited Commercial Banks Solicited Entity and Sukuk Rating Medium to Rating Rating Rating Date Long Term Short Term Outlook Action RATING TYPE: ENTITY 6/22/2017 AA A-1+ Stable Reaffirmed 6/2/2016 AA A-1+ Stable Reaffirmed 6/29/2015 AA A-1+ Stable Reaffirmed 6/24/2014 AA A-1+ Stable Reaffirmed 6/26/2013 AA A-1+ Stable Upgrade 6/1/2012 AA- A-1+ Stable Reaffirmed 6/1/2011 AA- A-1+ Stable Maintained Instrument Structure Statement by the Rating Team Probability of Default Disclaimer Rating Rating Date Medium to Long Term Rating Outlook Action RATING TYPE: SUKUK 6/22/2017 AA- Stable Reaffirmed 8/31/16 AA- Stable Preliminary 6/29/16 AA- Stable Preliminary Basel III compliant Tier 2, privately placed, unsecured & subordinated Sukuk amounting to Rs. 7.0b and has a tenor of 10 years. JCR-VIS, the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the credit rating(s) mentioned herein. This rating is an opinion on credit quality only and is not a recommendation to buy or sell any securities. JCR-VIS ratings opinions express ordinal ranking of risk, from strongest to weakest, within a universe of credit risk. Ratings are not intended as guarantees of credit quality or as exact measures of the probability that a particular issuer or particular debt issue will default. Information herein was obtained from sources believed to be accurate and reliable; however, JCR-VIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. JCR-VIS is not an NRSRO and its ratings are not NRSRO credit ratings. Copyright 2017 JCR-VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to JCR-VIS. 5 P a g e